If you’ve exhausted government student loans and still need to close a funding gap, taking out a private student loan can help you get enough money for school. And in some cases, personal loans can even have lower interest rates than federal loans. However, private student loans come with risks, can often be more expensive than federal loans, and can present newfound dilemmas for a borrower. So we asked the pros: first, what exactly is a personal student loan, and second, when thinking about taking out a personal student loan, what mistakes do you want to avoid? Check out the lowest student loan rates here.
What is a private student loan?
While a federal student loan is funded by the government, a private student loan is made by a lender such as a credit union or bank. Federal loans only have fixed interest rates, while personal loans can have either fixed or variable interest rates. Federal loans come with government protections such as: B. the ability to receive income-based repayment options, loan forgiveness and more (more on that later), while personal loans generally do not.
What mistakes do people make when taking out a personal student loan?
1. You didn’t max out your federal loans first
Anna Helhoski, student loan expert at NerdWallet, says the biggest mistake a student loan borrower could make when it comes to personal loans is to not exhaust state student loans first. “Bringing out federal student loans first will reduce the amount of personal debt you have to borrow to fill payment gaps,” says Helhoski. One reason pros say get federal loans first? They usually have far more generous repayment options, like income-based plans that base payments on your income; Loan Forgiveness Options; and forbearance and procrastination, which suspend payments for periods of time and longer.
2. You’ve gotten into low floating rates, but this isn’t for you
While private student loans are advertised with initial interest rates well below federal loans, “many private student loans charge variable rates, which is particularly bad in a rising rate environment like the one we’re experiencing,” said Ted Rossman, senior industry analyst at bank rate.
3. You did not check your credit score before applying
Many borrowers do not do a credit check before taking out a personal student loan, which can have a significant impact on their interest rates. “Errors in your credit history can affect your credit score, which in turn can affect your eligibility for a personal student loan and the interest rate you receive. If there is an error, you can have it removed by contesting it, and the creditor has only 30 days to confirm the information’s accuracy or remove it,” said Mark Kantrowitz, author of Who Graduates from College? Who does not.
4. You have withdrawn too much money
“Student loans aren’t free money, and every dollar you borrow costs about two dollars when you pay off the debt. You should borrow as little as you need, not as much as you can,” says Kantrowitz.
5. You haven’t looked around
It is also important to look for the cheapest loan. “The loan with the lowest advertised interest rate may not be the best loan for you because you may be getting a much higher interest rate,” says Kantrowitz. The only way to be sure you’re getting the best interest rate is to apply for and compare multiple loans. “You should also consider other factors such as fees, repayment duration, and payment pause options if you face an unexpected financial challenge like losing your job,” says Helhoski. However, you should be sure to only make a soft application as a hard application can affect your credit score.
6. You chose the wrong loan term
If you can afford to shorten your loan term, you should. “Even with the same interest rate, you pay more interest overall over the longer term, even if the monthly loan installment is lower,” says Kantrowitz.
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